Service Tax on Cross-Border Online Services in India – Explained

With a view to providing a level playing field to Indian Service Providers providing taxable ‘online information and database access or retrieval [OIDAR] services’ including electronic services in India, the Indian Government has made some revisions in its policies. The service tax exemption given to products in this category which may include Domain Names and Hosting has been withdrawn with effect from 1 December, 2016 for such services ‘provided in India’ by service providers located outside India or in a foreign territory.

Effective 1st December, 2016, Government of India has expanded the definition of OIDAR services (under Notification No.46, 47, 48 & 49/2016-S.T. dated 09.11.2016) to include electronic services such as

  • Advertising on the internet
  • Providing cloud services
  • Online supply of digital content
  • Digital data storage
  • Online gaming, etc.

What does this mean for you:

Going forward,

  • For business-to-business (B2B) transactions, the place of supply for OIDAR services will be the location of the service recipients. These services will become taxable under the reverse charge mechanism
  • For business-to-consumer (B2C) transactions, OIDAR services provided by an overseas service provider to Indian recipients will become taxable

The liability to pay service tax for B2C transactions will be shifted to the overseas service provider.

Service tax on Input Services – Purchase of Domain Names / Hosting Services

All resellers purchasing domain names / hosting services will have to pay a service tax of 15% on the cost of domain names / hosting services procured.

  • In case the domain names / hosting services are procured from an Indian entity/ registrar, service tax will be charged by such registrar on the invoice itself, over and above the selling price of domain names / hosting to the resellers
  • In case the domain names are purchased from a foreign entity/ registrar, service tax will not be charged on the face of the invoice raised by the foreign entity on the Indian reseller.  However, in such a situation, the Indian resellers will have to pay service tax @15% directly to the Indian Government under reverse charge mechanism
  • Thus whether the Reseller purchases the domains from an Indian company or from outside India, the Service tax implications in respect of the said transaction remains the same

Purchase of Domain Name / Hosting by Indian Reseller (B2B) from an Indian service Provider (for example, Resellerclub)

  • Whenever a reseller procures a domain name / hosting services he pays service tax @15% over and above the price.  The service tax so paid by the reseller can be regarded as ‘Input tax’ for the reseller
  • In turn, the reseller recovers 15% towards service tax from his Indian customers by charging service tax over and above his sales price. This Service tax collected by the Reseller from customers is regarded as ‘Output Liability’ for the reseller
  • However, under the Service tax regulations (CENVAT credit Rules, 2004), the amount of service tax paid by the reseller at the time of procuring the domain name / hosting (‘Input tax’) is allowed to be set off against the Output Liability and thus, the reseller is only liable to pay the differential sum as depicted in the following example:

The following example illustrates the benefits to reseller for services procured from an Indian service provider vis-a-vis from a foreign service provider such as GoDaddy:

                     Particulars ResellerClub Foreign entity
Domain Name / Hosting Services Procured 100.00 100.00
Taxes charged on Invoice 15.00 15.00
Cost for Reseller 115.00 115.00
Add: Service Tax Payable @15% under Reverse Charge Mechanism 17.25
Cash outflow for Reseller 115.00 132.25
CENVAT credit available (On Input Services) 15.00 17.25
Effective Cost for Reseller 100.00 115.00
*all figures are chosen for the purpose of illustration

Implication:

As things stand, if you are a Web Hosting/ Reseller / Web Designer or Developer business registered in India, you will enjoy a significant advantage with respect to effective price (assuming input prices are equal), with ResellerClub as compared to most other non-Indian providers for Domain Names and Hosting.

Please note: All the information and interpretations presented above are basis facts accessible to us as on 5 Dec 2016 and these are made on a best effort basis with assistance from our internal and external legal and tax experts. ResellerClub or its associates will not be liable for any decisions taken by third parties using this information, if you require further clarification with the impact of the revised policies, we strongly recommend that you contact a chartered accountant. Also note that any change in the country of registration of the foreign service providers in the future could have an impact on the calculations in these examples.

About Arshia

ArshiaAn avid traveller and a shameless foodie, Arshia also works as a marketing specialist and enjoys reading

Arshia

Arshia

An avid traveller and a shameless foodie, Arshia also works as a marketing specialist and enjoys reading